In China Vs Iron Ore Miners, Jan. 1 Isn’t Armageddon

In the saga of iron ore pricing, Jan. 1 has become a date of some importance – but isn’t actually the line in the sand that it’s been made out to be.

The view among some traders and industry watchers is that New Year’s Day is the deadline by which China, the world’s biggest iron ore buyer, and global ore miners like Rio Tinto and BHP Billiton, must reach an agreement on a yearly bulk price for iron ore. Without that agreement, so the thinking goes, the market won’t have the certainty it craves and chaos will ensue.

Not surprising if this sort of thinking makes for some sleepless nights. However, there may not be a need for all that insomnia.

For one thing, most iron ore contracts fall due on March 31, not. Dec. 31. And secondly, even for contracts that do expire, interim payment arrangements are often reached that allow trade to go on.

It’s easy to see how the confusion arose, and it has to do with the odd way that iron ore is priced.

Iron ore is the world’s most produced and consumed commodity by tonnage, and is also the basic ingredient for steel, the lifeblood of industry and development.

Its bulk price, also called the term or benchmark price, is the single most influential tag in the industry. You’d think advanced science would go into how that price is reached, but that’s not the case.

In Asia, it’s hammered out once a year by a few people – the buyers and sellers – huddled in a series of secretive meetings in China, Japan and Korea. Whichever country strikes a deal first effectively sets the price that everyone else follows, hence the moniker “benchmark.”

In years past, it used to be Japan that took the lead in setting the benchmark. The Japanese used the April 1 date as the start of their contract years.

Then, China rose swiftly to global industrial importance, and took over setting the benchmark.

The China Iron and Steel Association, which has a strong hand in directing the talks on the Chinese end, in the ill-fated 2009-2010 talks loudly insisted on a January 1 start date for the benchmark agreement, saying it would align better with the Chinese contract calendar. Of course, some of us who watch the industry also noticed that, in a year when price discounts were a certainty, a Jan. 1 contract start date would have lopped a good chunk of payments from three months of the expensive preceding contract.

For the 2010-2011 term, the benchmark price is widely expected to rise, and the Chinese buyers haven’t been quite as loud about the Jan. 1 “deadline.”

Going by the experience of the 2009-2010 negotiations, in which “deadline” after “deadline” fell apart in the fruitless quest for an agreement, the iron ore story depends less on a specific date than on what a few people in secretive meetings can agree on.

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